AlphaWeek Q&A: Tricia Johnston, COO, EDD Fund Services
AlphaWeek’s Greg Winterton spoke with Tricia Johnston, COO of EDD Fund Services, a portfolio management system that has been built from the ground up to meet the demanding requirements of hedge funds and CTAs that need a full front to back data processing solution.
GW: With regards to interest from CTAs in technology, is that being driven by managers being proactive or is it reactionary to investor/allocator demands?
TJ: CTAs come to us because they need to upgrade their technology, often because of investor demand or because their business is scaling up. They are pursuing the efficiencies that technology investment provides them with, as well as looking to reduce their operational risks.
Sometimes they get pushed into this decision; maybe this is because their investors are asking this of them, or because they realise they need to upgrade in order to continue growing their business. Sometimes it is because they need a way to comply with new regulations.
GW: How is regulation impacting technological change and are there cross-border challenges which CTAs can address by investing more into technology?
TJ: The reporting demands from MiFID II, AIFMD and the NFA are numerous, so it is important for a CTA to be able to serve these demands from a single platform. Some CTAs will go with a bolt on solution for this, some may have existing infrastructure which they can adapt. But they have to have something.
The new regulatory challenges throw up operational and regulatory issues. Providing wrong or inaccurate information to a regulator can get you into big trouble.
That’s why we are having conversations with CTAs about helping them to meet these challenges with automation.
GW: What sort of portfolio management challenges do you see CTAs facing most commonly?
TJ: One of the big ones is where CTAs are trading prices or using data that is not widely available. This is particularly the case where some of the markets they are dealing with are illiquid. They need to be able to stay on top of that risk. We have the data services already in place to serve that piece.
When you look at product categorization, making sure that you have each instrument in the portfolio correctly categorized, it’s harder with some of these instruments to bring data in automatically and embed that in a CTA’s regulatory reporting.
GW: Where do you think CTAs are going with their middle and back office connectivity and what do they need to do to address this?
TJ: Many inefficiencies creep in at the very beginning when a CTA is set up. Many of them are using unique trading tools, not your typical, off-the-shelf stuff. Not only that, they also end up dealing with different counterparties. There is a big need for more integration, to realise efficiencies and have the appropriate connectivity in place for the middle office.
A CTA’s counterparties will often want an electronic interface. This not just the case with the high volume counterparties. There is a desire in the industry to make each touch point more automatic. Without this a CTA can begin to lose its capacity to grow.
I foresee more being asked of CTAs in this respect – there will be a need for more connections, more pipes. It will require investment.
Take for example a typical CTA MA client – they will drive which bank to use, and that will usually be different from the next client. The more managed accounts a CTA takes on, the more connections they end up needing to make.
Where we see our role is helping to create that capacity for CTAs to continue to grow.
GW: Where can CTAs realise an advantage from the way they manage their trade data?
TJ: If you have all the information, the accurate information, and it is fully reconciled, then you are up to date. But because CTAs tend to use managed accounts, and they don’t necessarily have an administrator, they will still need to keep their own records.
In addition, they may lack the risk management advantage that accrues from accurate data. The use of VaR and other risk metrics means that if you don’t have the right information, the clean information, then you don’t have that advantage that good risk management can deliver. The basic data has to be right.
CTAs can also realise operational efficiencies if they can derive their portfolio data as much as possible from a single source. There is a case to be made to keeping the number of applications you are operating inside a CTA down to the minimum. Otherwise there is going to be a danger that data sets are not going to be properly reconciled, and unnecessary latencies are going to creep in. That’s not something the modern CTA is going to want.